The Top Five Investing Posts from The Wall Street Journal’s Experts Blog in 2015

2:52 am ESTDec 31, 2015

share

What do the Marine Corps, guaranteed annuities and retirement savings have in common?

These were some of the investing topics that readers found most compelling in The Wall Street Journal’s Experts blogs in 2015.

Topics in some of the other most-popular posts: why even the rich need budgets, the math on index funds, and a number of suggestions for better teaching students about personal finance.

The Experts is made up of a panel of financial advisers, academics and other investment analysts who weigh in on the big issues they see in the field. It is a part of the digital presence of The Journal Report online.

1. What the Marine Corps Taught Me About Investing

WESLEY GRAY: The lessons learned in combat are increasingly applicable on Wall Street. I find that as volatility and instant information become the “new normal,” the tried-and-true lessons of the U.S. Marine Corps become indispensable.

I served in the Marine Corps from 2004 to 2008. Deploying to Iraq and living with an Iraqi Army battalion was an unforgettable experience and an extreme privilege. Civilians often say “thank you for your service.” However, the real “thanks” is due to the Corps for providing a humble quant with lifelong lessons in leadership, humility and perseverance.

Below are three key combat lessons that I have found useful in my investing endeavors and you may find useful in yours.

Follow the model: Stressful situations breed bad decisions. To avoid making bad decisions in combat, Marines train with standard operating procedures. The end game is to ensure Marines avoid “gut-instinct” and focus on tried-and-true processes. Investors should follow a similar playbook. Build checklists, identify systems and follow a process religiously. These steps build discipline and prevent us from going 100% cash when the market drops 50%.

Trust evidence, not Rambo: In combat, Rambo doesn’t exist. While the story of an invincible, bullet-dodging warrior is cool, the reality of following such individuals can be catastrophic. Intelligence, cunning, and training win battles, not wishful machismo. Of course, Rambo is an extreme example—but there are certainly “Rambos” on Wall Street. Investors want to believe in heroes, such as the unicorn hedge-fund manager, the high-tech stock that just has to keep growing, or my favorite: the retirement portfolio that provides equity returns with no downside risk. Beating the market forever is literally impossible. Ditch Rambo and stick to the data.

Integrity is everything:Warren Buffett said: “In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.” Integrity is critical to the Marine Corps’ central mission. The financial industry shouldn’t be any different: Sadly, there are many examples, both illegal and legal, of investors’ wealth being eroded (or altogether destroyed) by illicit actors. Do your homework, read the fine print and ask tough questions. The right adviser will showcase their operations and welcome your queries. If you don’t get straight answers, find the nearest exit.

The first two lessons revolve around preventing overconfidence. Humans are fundamentally biased and make mistakes (even hedge-fund managers). In terms of finance, these biases create mispricings in the marketplace. We, as humans, are flawed, but we can overcome our deficiencies through systematic decision making.

Underpinning all of these traits is our third, and most important lesson: Integrity is everything. In the end, whether we are operating in a business environment or a military environment, integrity is the test that separates mission success from mission failure.

Today, I am continually reminded that the “combat classroom” proves to be the best preparation for a deployment to Wall Street. Happy Veterans Day and Semper Fidelis!

2. Why Guaranteed Annuities Belong in 401(k)s

TED JENKIN: Annuities often get a bad rap in the public marketplace. You’ll read they have high fees. You’ll read they have high commissions. You’ll read that financial adviser salespeople love to sell them. However, if you talk to some of the happiest people in retirement like my own mother, you’ll hear that one of the main financial reasons she is happy is that a fixed paycheck comes to her each and every month for the rest of her life. She doesn’t worry about the stock market, the bond market or the real-estate market. The reason is because she gets payments from an annuity for the rest of her life.

One way to give more investors that kind of peace of mind is to require all employer-sponsored 401(k) plans to have a guaranteed-income annuity as an investment option.

Consider for a moment that pensions have all but disappeared from major Fortune 500 corporations and most people today are suspect about how much they will get from Social Security. So the burden of saving for retirement is squarely on the shoulders of you, the individual. While most 401(k)s offer 10 to 20 choices on where to direct your funds (and now most offer target-date funds), it still can be extremely confusing and challenging for the average investor to know how to allocate their 401(k) funds.

In a recent study I conducted at my firm, I asked 100 individuals if they use the automatic-rebalancing feature available to them online through their 401(k) provider. The answer: 98 of the 100 didn’t even know that automatic rebalancing was as an actual feature. Each one of the professionals I asked were making more than six figures and had a 401(k) balance of more $100,000.

Guaranteed deferred income annuities, which allow you to put away a portion of your paycheck or savings and then at a certain age down the road start getting a guaranteed income, could be an excellent option to give retirement-plan participants a steady stream of income in retirement. (Other guaranteed annuities, including variable annuities with income-protection riders, are also options.) This may be more expensive than a low-cost ETF or mutual-fund strategy. But given the choice, wouldn’t many consumers want to spend the extra money to know that they will have a retirement income they cannot outlive?

The challenging part about adding guaranteed annuities to 401(k)s is that the investment choices in the plans vary widely. Although there are new fiduciary standards for fee disclosure and investment choices, there is no mandate for an option to pay for a guaranteed income stream.

Isn’t having a guaranteed annuity option for 401(k)s worth a debate? Or should we just assume that the average American not only knows how to accumulate money in his or her 401(k) but also has the skill to know how to distribute it–and make it last–during retirement?

3. Three Key Concepts Every Personal-Finance Class Should Teach

ANNAMARIA LUSARDI: More than ever before, we must make financial decisions that are important and consequential. How much should we contribute to retirement accounts and how should we invest our retirement savings? Should we enroll in a health-insurance plan with a low or high deductible? What do we need for our children’s education? Household finances have become sufficiently complex that simple intuition or the advice of family and friends is not enough to guarantee good choices.

There are courses in corporate finance and specialized curricula for managing firms’ finances, but what is available when we serve as our own chief financial officer?

Fortunately, personal finance is a subject finally making its way into schools, from high schools to colleges to graduate programs. Online courses are also springing up, and some employers have started to offer financial education programs to their employees.

What should the content of such courses be? As member of the Board of Directors of the Council for Economic Education, I served as an adviser on the National Standards for Financial Literacy. From these standards, we can identify some of the crucial concepts that everybody needs to make informed financial decisions. I am going to focus on three, the Big Three as I tell my students.

One fundamental principle of personal finance is the power of interest compounding. This knowledge is key for saving, borrowing and investing decisions. It enables us to understand, for example, why it is important to start to save early. And we need to do calculations to see results. If I borrow at 20% on my credit card, how long does it take before my initial debt doubles? If expenses and fees reduce my rate of return by one percentage point, how is my wealth affected over a 30-year horizon?

Because financial decisions are inherently about the future, we must consider how money’s purchasing power changes over time. We must also acknowledge that the future is uncertain. That brings into play two more building blocks: knowledge of inflation and risk. Distinguishing between real and nominal values is essential to keeping a stable standard of living over a lifetime. Indeed, personal finance is where we can fully appreciate the critical role the Federal Reserve and its monetary policy play, especially when it comes to low and stable inflation and its implications for financial planning.

Knowledge of risk and risk diversification is at the basis of portfolio choice. We can formally prove that the old adage “do not put all of your eggs in one basket” is, indeed, good advice. Even more, we can learn how to implement it well. Moreover, we can protect ourselves and our wealth from the many sources of risks: interest-rate risk, health risk, and the risk of living too long!

Annamaria Lusardi is the Denit Trust Chair of Economics and Accountancy at the George Washington University School of Business, where she focuses on financial literacy, personal finance and macroeconomics.

4. The Case for Forcing People to Save for Retirement

MANISHA THAKOR: A question many of us ask ourselves at the start of a new year is how we can improve the process of making highly personal decisions in our lives about health, happiness and–yes–wealth. In their 2009 book “Nudge,” professors Richard Thaler and Cass Sunstein give us some powerful clues.

It turns out that “forcing” people to save in workplace retirement plans (where your default option is participation, and the only way to avoid it is through the “hard work” of proactively opting out) is highly effective in increasing our financial well-being. Here’s an idea comes from Thaler’s innovative Save More Tomorrow Plan: If the government required all workers to invest a portion of their earnings in low-cost, index-like funds with a default mix of 60% stocks and 40% bonds, set a minimum saving threshold of 5%-10% a year, and again defaulted to taking at least 30% of each raise and allocating it to long-term savings, many more Americans would be on the right retirement track.

The root concept behind this hypothetical and draconian intervention of government into our personal lives is that we humans are pleasure-seeking creatures. We tend to value joy today over security tomorrow, rather than trying to find common ground and balance the two. The ugly truth is that–collectively, as humans–we are fundamentally bad at saving. As such, while the aforementioned plan would likely never see full implementation, the concept may pave the way for the introduction of other types of structural safeguards. In the absence of such safeguards, people are likely to shoot themselves in the foot with their own financial bazooka. We already see alarming evidence of this when looking at the (paltry) size, on average, of baby boomers’ retirement accounts.
Lest you think this is a totally crazy idea, there are countries where variations of this plan are happening now. Chile is a classic example. Since the 1981 creation of a national defined contribution pension plan, workers are required to contribute 10%. This is not to imply Chile’s system is perfect. Self-employed workers may, but are not required, to contribute and clearly it doesn’t address those who are unable to work. Additionally, academic studies show high levels of financial illiteracy amongst participants about how these plans function.

Bottom line, for most people–outside of your family, your religion and your causes–money is one of the next most important things in your life. Of course, we should acknowledge that money can mean very different things to different people. For some, it represents a voice at the table and flexibility of choices in life. For others, it’s raw status and power. No matter what the end goal, our educational system has largely failed us in this subject area.

Lacking a nationwide financial literacy curriculum starting in high school, what most people end up learning about money comes from suitability-driven, fancy-suit-wearing, Wall Street shills selling us their latest wares with profit, not education, as their primary motivation.

5. The Top 10 Mistakes Investors Consistently Make

TED JENKIN: There may be nothing more haunting than the bad decisions we have made in our lives. More often than not, most of us tend to dwell on the things that haven’t gone well versus the things that have gone well.

This year-end can be a good opportunity to consider the financial decisions that have gone wrong or prevented you from moving forward–and make the necessary adjustments to improve your financial future. Here are my top 10 from the holiday naughty list.

1. Investing in things you don’t understand. You’ve done it before, now stop it. If you can’t explain it, don’t bother putting your money in it. For example, don’t buy a mutual fund or an exchanged-traded fund if you don’t understand the investment risks. Think about the people who bought gold at the top of the market a few years ago and where prices are today.

2. Investing in a friend’s business. If you aren’t running it, don’t put money in it. Nine out of 10 times, you’ll lose your investment. And in many instance​s​, you could lose the friendship as well.

3. Buying too large a home. Count how many rooms in your home you don’t use. If it is more than one, you’ve made a mistake. What’s more, many people​ ​often fail to​ factor in the cost of ongoing maintenance and upkeep of a larger house.

4. Buying a new car. It’s the best way to lose your money quickly– not to mention the upkeep when the car costs $50,000 or more. Stick to ​buying a two-year-old automobile. If I told you that I had an investment that was guaranteed to lose money, would you go ahead with it? This is what happens when you buy a new car.

5. Forgetting to increase savings. When you make more money, unless you put it away automatically, the spending gods will get it. You need to set up a weekly or monthly automatic transfer to a savings or retirement account. Get the money out of your hands.

6. Not setting vacation budgets. Every vacation doesn’t have to be at a four-star or five-star hotel. A few nice memories of vacations are important, but if you are spending $10,000 or more a year on vacations, there might be a problem.

7. Not having an exit plan from your job. Large companies can have a heart smaller than the Grinch. Make sure you have a Plan B in case you need to exit stage left. For instance, if your employer needs to meet Wall Street earnings expectations over the next few quarters and sales aren’t growing, watch out for upcoming cost-cutting.

8. Having too much money in company stock. We all know it’s a big investor mistake to put too many eggs in one basket, but people often do it when it comes to their employer. You don’t want your employer to provide both your salary and your retirement income. Ask anyone who ​experienced the technology bubble in 2000 or the market as a whole in 2008​.

9. Not creating a family financial plan​. ​Spouses need to be in sync financially ​in order to accomplish savings and retirement goals. But if you have a spender vs. saver relationship, that can be difficult without a plan and a budget in place–and the wherewithal to stick with it. If both of you are spenders, getting help from a financial coach may be the best investment you’ll ever make.

​10. Debt, period! Forget about a lump of coal in your stocking. Debt from holiday and other spending feels like a ton or bricks sitting on your shoulders months–or even years–later. Of course, having a lack of debt leaves more money for saving and investing. But also factor in how debt makes you feel emotionally. I love the feeling of being debt-free.

Don’t be embarrassed by the existence of these financial ghosts. The way to exorcise them is by not making the mistakes twice.